MRO Magazine

Gap between rich and poor continues to grow; Where does Canada stand?

Paris, France - The gap between rich and poor in OECD countries has reached its highest level for over 30 years, and governments must act quickly to tackle inequality, according to a new OECD report.


Paris, France – The gap between rich and poor in OECD countries has reached its highest level for over 30 years, and governments must act quickly to tackle inequality, according to a new OECD report.

The OECD is the Organization for Economic Co-operation and Development. Its mission is to promote policies that will improve the economic and social well-being of people around the world.

Divided We Stand: Why Inequality Keeps Rising finds that the average income of the richest 10% is now about nine times that of the poorest 10 % across the OECD study.

The income gap has risen even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, from 5 to 1 in the 1980s to 6 to 1 today. The gap is 10 to 1 in Italy, Japan, Korea and the United Kingdom, and higher still, at 14 to 1 in Israel, Turkey and the United States.

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In Chile and Mexico, the incomes of the richest are still more than 25 times those of the poorest, the highest in the OECD, but this gap has finally started dropping.

Income inequality is much higher in some major emerging economies outside the OECD area. At 50 to 1, Brazil’s income gap remains much higher than in many other countries, although it has been falling significantly over the past decade.

Results for Canada

Income inequality among working-age persons has been rising in Canada, particularly since the mid-1990s. According to the latest data, the level of inequality is above the OECD average but still below that of the US. The average income of the top 10% of Canadians in 2008 was C$103,500 (US$84,600), 10 times higher than that of the bottom 10%, who had an average income of C$10,260 (US$8,400). This is up from a ratio of 8 to 1 in the early 1990s.

The rise in inequality was largely due to widening disparities in labour earnings between high- and low-paid workers, but also to less redistribution. Taxes and benefits reduce inequality less in Canada than in most OECD countries.

The richest 1% of Canadians saw their share of total income increase from 8.1% in 1980 to 13.3% in 2007. Moreover, that of the richest 0.1% more than doubled, from 2% to 5.3%. At the same time, the top federal marginal income tax rates saw a marked decline: dropping from 43% in 1981 to 29% in 2010.

The divide in hours worked between higher- and lower-wage earners in Canada is growing, confirming a trend seen in most OECD countries. Since the mid-1980s, annual hours of low-wage workers fell from 1,300 to 1,100 hours, while those of higher-wage workers fell by less, from 2,200 to 2,100 hours.

In Canada, increased earnings inequality was also driven by a rise in self-employment, as on the whole the self-employed earn less than full-time workers. This explains more than one-quarter of the increase.

Societal changes, such as more single-parent families and people living alone, and people marrying within similar earnings classes, contributed little to inequality. At the same time, higher employment rates for women helped reduce household earnings inequality by around the same amount. The rising gap between men’s earnings remains the main driver, explaining more than 40% of the increase.

Prior to the mid-1990s, the Canadian tax-benefit system was as effective as those in the Nordic countries in stabilizing inequality, offsetting more than 70% of the rise in market income inequality. The effect of redistribution has declined since then: taxes and benefits only offset less than 40% of the rise in inequality.

This downward trend in redistribution was largely driven by the reduced role of means-tested transfers: benefit rates fell and benefits became less targeted. Changes in income tax rates played less of a role.

Social spending in Canada relies more on public services (education, health, etc.) than on cash transfers, such as unemployment and family benefits. Only Korea, Mexico and Iceland put a higher weight on services. Overall, services cut inequality by the same amount than do cash transfers: some 20%.

Comprehensive strategy needed

Launching the report in Paris, OECD Secretary-General Angel Gurría said “The social contract is starting to unravel in many countries. This study dispels the assumptions that the benefits of economic growth will automatically trickle down to the disadvantaged and that greater inequality fosters greater social mobility. Without a comprehensive strategy for inclusive growth, inequality will likely continue to rise.”

The main driver behind rising income gaps has been greater inequality in wages and salaries, as the high-skilled have benefitted more from technological progress than the low-skilled. Reforms to boost competition and to make labour markets more adaptable, for example by promoting part-time work or more flexible hours, have promoted productivity and brought more people into work, especially women and low-paid workers. But the rise in part-time and low-paid work also extended the wage gap.

Tax and benefit systems play a major role in reducing market-driven inequality, but have become less effective at redistributing income since the mid-1990s. The main reason lies on the benefits side: benefits levels fell in nearly all OECD countries, eligibility rules were tightened to contain spending on social protection, and transfers to the poorest failed to keep pace with earnings growth.

As a result, the benefit system in most countries has become less effective in reducing inequalities over the past 15 years.

Another factor has been a cut in top tax rates for high-earners.

“There is nothing inevitable about high and growing inequalities,” said Mr Gurría. “Our report clearly indicates that upskilling of the workforce is by far the most powerful instrument to counter rising income inequality. The investment in people must begin in early childhood and be followed through into formal education and work.”

The OECD underlines the need for governments to review their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden. This can be achieved by raising marginal tax rates on the rich but also improving tax compliance, eliminating tax deductions, and reassessing the role of taxes in all forms of property and wealth, the report says.

Key policy recommendations for OECD countries

– Employment is the most promising way of tackling inequality. The biggest challenge is creating more and better jobs that offer good career prospects and a real chance to people to escape poverty.

– Investing in human capital is key. This must begin from early childhood and be sustained through compulsory education. Once the transition from school to work has been accomplished, there must be sufficient incentives for workers and employers to invest in skills throughout the working life.

– Reforming tax and benefit policies is the most direct instrument for increasing redistributive effects. Large and persistent losses in low-income groups following recessions underline the importance of government transfers and well-conceived income-support policies.

– The growing share of income going to top earners means that this group now has a greater capacity to pay taxes. In this context governments may re-examine the redistributive role of taxation to ensure that wealthier individuals contribute their fair share of the tax burden.

– The provision of freely accessible and high-quality public services, such as education, health, and family care, is important.

More information about Divided We Stand, including a four-page summary, is available at www.oecd.org/els/social/inequality.